Friday, March 27, 2009

Fordham, continued

Why is Tiffany Blue? 3rd-Party Liability and the eBay Cases

Moderator: Susan Scafidi, Visiting Professor of Law, Fordham School of Law

eBay has been sued here and elsewhere. Rolex won against eBay in Germany, requiring eBay to monitor; subsequently, eBay was found to be sufficiently monitoring. eBay lost cases in France against Hermes and LMVH. Then in Belgium, Loreal lost to eBay. Around the same time, Tiffany sued and lost in the US.

Joseph C. Gioconda, Partner, DLA Piper USA LLP (head of anticounterfeiting): Has represented eBay in some matters and Tiffany in others, but here is speaking as Tiffany’s lawyer. When he started, the contributory liability standards evolved out of brick-and-mortar operations. Judgment-proof defendants, often part of a large criminal enterprise; the people actually selling the goods were often victims of human trafficking. Designers really needed effective weapons—go after the landlords, who have deeper pockets. C&D: we have used private investigators and discovered 1000s of counterfeit sales; you are on actual and constructive notice, and you must put a stop to it or we’ll take your building.

Now this has evolved dramatically—online counterfeit drugs, so he works with pharmacos every day, not just handbag makers for whom there is less public sympathy. The eBay case was closely watched by everyone—designers, pharmacos, ISPs. Assuming that this case becomes Second Circuit law, what do we do? Did eBay do so much that other people can’t afford to do? The court tied its ruling to the facts, and eBay capably showed it was a responsible corporate citizen, so the court found that the general notice—which would have been fine if given to a landlord—wasn’t sufficient. If I don’t have eBay’s resources, an ISP asks, what should I be doing? If the ruling is upheld, should TM owners go to Congress? Should ISPs adopt eBay’s model?

Randi W. Singer, Partner, Weil, Gotshal & Manges LLP: eBay’s counsel in the case. Lots of people think eBay has a big warehouse with all the goods, but it doesn’t. Tiffany demanded that counterfeit goods be removed, and said we’ll make it easy: lots of 5 or more are counterfeit. There were other issues with keywords and sponsored links. eBay is a TM owner itself and respects TM owners’ rights, and has the VeRO system—a notice and takedown system, which works very well (comment: ha!) in the copyright context. eBay refunds users who complain they’ve purchased counterfeit goods. eBay doesn’t like counterfeiting!

Problem: you often need physical possession to discern counterfeiting: assays, measure depth of mark, etc. eBay responds to Tiffany: If we did what you asked for you, we’d have to do it for 15,000 TM owners. eBay filters out listings that red-flag their counterfeit status. It’s easy to filter out guns or lawn darts, which are flat-out banned. It’s more difficult with jewelry, because a legitimate secondary market exists. (This is why I only use eBay to buy Kate Hines jewelry, not better-known names—she’s not counterfeited.) Tiffany was never able to articulate a bright-line rule that could be technologically implemented. eBay had already taken out the low-hanging fruit, and the remainder required some expertise, which Tiffany had more of than eBay. Tiffany conceded that eBay always responded to Tiffany takedowns.

Basic TM law: the TM owner has the duty to police its mark. Tiffany wanted to push that burden onto eBay. Tiffany’s position: generalized knowledge should suffice. eBay’s business model depends on good faith cooperation between eBay and rights owners.

Giaconda: A couple of facts: 15,000 brand owners on eBay, but they’re not all multimillion-dollar businesses that can employ paralegals fulltime to send takedown notices to eBay (are they then heavily counterfeited on eBay?). So to say brand owners have to bear, not share, the cost may allow Tiffany to fight counterfeiting, others will have to trade off brand protection against other objectives, and is that fair? eBay gets a direct pecuniary benefit from the price of each item sold, which in many cases are admittedly counterfeit.

William R. Engles, Jr., Chief Financial Officer, Portero, Inc.

Online secondary market for luxury items: watches, jewelry, high-end handbags, housewares, art. Began as eBay drop-off model, focused on luxury—Greenwich, CT. Differentiated from eBay: guaranteed authenticity. In 2006, changed sourcing model—no physical stores, added dealer and brand relationships, but stayed on eBay until 2007. Then launched own site in early 2007.

Certify every item as authentic before it’s listed. Not a neutral platform—the buyer doeals with Portero, not a third party seller. Has partnerships with certain luxury industry players who certify authenticity.

Good for brands: divert consumers away from uncertified sites.

His experience on eBay: eBay bends over backwards in favor of the rights owner. Seller’s only recourse is to go to rights owner and ask them to rescind. Most luxury brands don’t want a secondary market, and thus they won’t rescind the notice no matter what, though sometimes Portero was successful—once, the legal department shut down auctions that had actually been sourced directly from the rights owner; Portero had to ask the marketers to go down the hall and talk to legal.

VeRO was ineffective and too broad in favor of the rights owner. Doesn’t work for luxury items. It’s not the right buyer group. Only 10% of their present clientele bought from them on eBay—people looking for bargains go to eBay. The third party ought to stand behind its items.

Frederick Felman, Chief Marketing Officer, MarkMonitor

Counterfeiting is not a victimless crime. Counterfeit character mask made with harmful chemicals scarred a kid for life. Counterfeit drugs; lead poisoning from counterfeit jewelry. Tiffany sent 235,000 notices to eBay—think about the burden on Tiffany. It’s automated now, but it wasn’t at the beginning. The clients who enforce with great consistency see infringement decline over time, most of them substantially. It takes a lot to establish an eBay identity, so infringers are more likely to go away—you don’t have to be faster than the bear chasing you, you just have to be faster than the other guy he’s chasing; counterfeiters move on to easier targets. That means that smaller guys do suffer, but not at the same scale that Tiffany did.

Practical things for defending a brand: Work with business side and allocate tasks. Make sure you have a benchmark to see whether you’re getting a return on investment. Devote sufficient resources to get it done: the hard part is monitoring. Infringement happens other than on eBay—B2B operators who sell to others, including retailers. Trace it back to the source, the manufacturer. The FBI only prosecutes 280 counterfeiting cases a year; they don’t have the resources to help you, so you have to help yourself. Look who else in your segment is being hit, and see if there are enforcement acts you can take (together? Antitrust concerns?). Don’t do it if you’re a Tiffany or another large brand without automation. You need to crosslist sellers so you can take action against the multiple offenders.

Singer: There’s only so much eBay can do; eBay has crashed its system adding rules to its filters before. There are smaller players out there, and the point isn’t that VeRO isn’t the end-all but that eBay wants to cooperate. It’s more profitable to build a healthy marketplace with a certain level of trust—a clean, well-lighted place as a longterm business model. (What isn’t being said here, of course, is that some consumers are perfectly happy with the knockoffs, so their interests diverge from the TM owner’s; eBay’s interests align more with consumers than with TM owners.)

Engles: His perception of eBay corporate culture was very anti-counterfeiting.

Giaconda: the eBay decision isn’t just about eBay—eBay is a bellwether for online markets. If a brand spends a lot of money and paralegal time, over time you see changes in the marketplace. But eBay is only one market. If you’re Amazon, or a direct retailer, or a new business: what do you do? The economics adapt to the law; this is about cost-shifting. His clients are sophisticated and wealthy, but relatively smaller businesses/start-ups, they have difficulty.

Q: eBay has so many disputes each year; does law have anything to do with it, or is it just a function of technology? What tech is practical/foreseeable to reduce the incidence of counterfeiting?

Singer: Recall that the fact record in this case was frozen 2005/2006. Some of eBay’s newer measures include things like barring very short auctions for certain luxury items, to avoid lightning-strike counterfeiters; you can’t join eBay and then immediately list 100 Tiffany items. The tech to do that didn’t exist when the dispute started.

Felman: Tech can’t assess many TM disputes over rights, but it can boil down some issues, can help you find recidivists, can help you decide where to focus your efforts.

Giaconda: Tech is great, but when you find the source of the counterfeits, then it’s often in China, and then what you have is an international legal proceeding.

Q: Can you use RFID or similar tech?

Giaconda: Sophisticated counterfeiters buy one genuine product, and post pictures of the receipt and the like.

Q: What are the remedies for people on the other side of a VeRO notice?

Singer: eBay does have a counternotification procedure. It depends on the rights owner.

Engles: We were a big seller, and eBay still wanted us to work with the rights owner. For smaller ones, he’s not sure what they do.

Singer: Policy decision, err on side of rights owner.

Q: Risk to competition—if the policing requirements are onerous enough, smaller players will be driven out. Good for eBay, bad for competition. Happened with COPPA: sites for children have mostly been driven out of business, and you end up with Disney/Club Penguin as the dominant players.

Giaconda: Good question. DMCA as an experiment in this context. A statutory solution might be good—giving a list of 5-10 things necessary and sufficient to qualify for a safe harbor. That lets the new players start up with some certainty. He doesn’t think that would be a dramatic shift, because legit marketplaces are probably doing some or all of these things and illegitimate ones may be struggling in this market. The real question: without a bright line rule, will tech work and will the brand owners invest in the tech? Personally: he likes bright lines better than the tort system at common law, which is complicated and slow—haven’t even scheduled the argument in Tiffany v. eBay. By the time the Second Circuit issues a decision, things will have changed again.

Felman: Notice and takedown is now under consideration by ICANN for new top-level domain names, because of the success of the DMCA. (Success is one word for it, in my opinion, but not necessarily the right word.)

Q: How many takedown notices are erroneous?

Singer: it’s hard to say. eBay doesn’t have a good way of knowing whether the notice of claimed infringement is valid any more than it has a good way of knowing whether the listing is counterfeit.

Q: Any cases against rightsowners for abusive notices?

Felman: Some claims reported on, but not much.

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